We just finished putting together our goals for 2008 [1]. Each year after finalizing our goals we put together a new budget for the year. In this series, we’ll take a look at how we budget, how we use it and our budget by category.
How We Create the Budget
We use last years budget as a starting point. I use a report in Microsoft Money to see what the typical monthly spending in each category looked like and I put a target range on each subcategory. Then I create a deviance report to see which items are falling too high or too low from the target.
This year we had multiple categories that spending was much higher than the initial budget so I met with my husband to determine where we wanted to allocate additional money. (Especially since one of the categories that was coming in over was his hobby.)
I finalized the budget by adding in some expense reminders that we don’t currently have in the mid-year expense column.
What Do We Do With Our Budget?
I create the budget in Excel. As bills come in, I subtract each one from each category on our running list [2] of monthly bills. However, I don’t enforce a strict adherence to the budget. If we’re over in one category or under in another it doesn’t seem to matter much.
At the end of the month, I take any leftover and carry it forward to the next month, invest it [3] or put it toward our goals. Therefore you likely won’t see a report in the future on “how well” we adhered to our budget.
If we are significantly over for a month, usually for an unexpected expense, I create a budget busters [4] entry. I feel like this is incentive to earn some money to pay it off rather than dip into savings. It keeps our spending in line.
Irregular Expenses
To handle expenses that don’t occur every month, I create a lot of sub-accounts. I fund them each month and let the savings build up over time so that when an expense occurs in that category I can pay it from the appropriate sub-account.
Budget Details: Vehicle Category
Here’s a breakdown of our budget in the vehicle category. Click on the budget to see a bigger version if needed.
I’ve discussed before my car and the dilemma of whether or not to sell it [5]. We financed it because the rate was lower than the money we earn on our savings account, however I’m thinking of paying it off because the savings rates have gone down. Our other car doesn’t have a loan against it.
The motorcycle has a loan on it for one reason: I was teaching my husband about finances. When he decided to purchase it, I made him go to the credit union by himself and take out a loan. Sure we could have paid cash for it, but I felt like he might somehow feel more connected to it financially if he had to take out a loan. In hindsight, I probably didn’t really accomplish anything there because I pay the bills, but I think it was still a good option as the interest rate was also less than our savings accounts; so financially we still come out ahead.
The auto maintenance fund and the motorcycle fund are sub-accounts at ING Direct [6] that I fund year round. They covers oil changes, tune-ups, tires, etc. When I asked my husband to review the budget this was one area that he emphasized didn’t have enough money allocated to it.
Action Plan
As part of my strategy to stay home with my kids [7] I identified the vehicle category as an area I can trim in. Eliminating my car payment will be a big boost to the monthly budget. I’m still hesitant to just pay it off from savings. Rather, I’m thinking again of selling it and buying a cheaper car, as that would be a better financial move than just paying it off.
Stay tuned when we analyze the next budget category.
How do you budget?